Peet's Coffee & Tea, Inc. (NASDAQ:PEET)

The Company sells fresh roasted coffee, hand selected tea, and related merchandise in several distribution channels, including grocery, home delivery, food service and office accounts and company-operated retail stores.

Underperformers seem to be right at first, but look at the stock chart vs. the S&P. It's rocketing up right now. Americans can't ever stay away from coffee, and the serious coffee drinkers will pick Peet's over Starbucks "every day of the week and twice on Sunday."

The thing is I'd like to agree with the underperformers, but coffee is one of those things American can't stay away from. And, if you had a choice for serious coffee drinkers, Peet's beats out Coffee Bean and Starbucks. Coffee Bean started becoming Starbucks three years ago, but if Peet's keeps with its focus of coffee drinkers who love the taste of coffee for what it is, it should be alright.

The 8$ bump on buyout rumors will dissipate over the summer if it never materializes; I don't see it happening at current valuations (too much overlap not enough 'synergy') so I'm currently bearish on PEET.

I’ve been jonesing for a Peets mocha for days now but my wife keeps “encouraging” me to stay away from the delicious liquid that some compare to rocket fuel. I’ve also been lusting after shares of this Northern California house of coffee worship. PEET is currently trading at $38.03 with a P/E of 26. That’s not cheap by any standard of measure, but based on Rolling EPS numbers, PEET has delivered stair-step earnings since early 2008, and it’s at a near historical low on a P/E basis. Stores are springing up all over the Bay Area and beyond. More importantly, their coffee is, in my opinion, the best. Starbucks coffee tastes watered down and unflavorful by comparison.

Recent earnings growth has been impressive; 158% for the most recent quarter vs. last year’s comparable quarter, and 18.23% over the last 5 years. Analysts guesstimate a long term growth rate of 18.25%. I think the stock is in the ballpark of fair value based purely on earnings growth.

Moreover, PEET’s balance sheet is strong. $48MM in cash on the books and no long term debt. Free cashflow is very strong in 2010 although it was not as impressive the prior 2 years, due to aggressive new store openings.

Its key competitor is of course Starbucks, but as I said before, I don’t think it’s a fair fight. PEET simply blows Starbucks away. The long lines of customers during the day confirm this. One concern I have is whether PEET can make it outside of California where it has a cult following. Management seems to be very thoughtful about expansion. Hopefully they won’t repeat Starbuck’s mistakes in this area. PEET seems to be making the right moves, including selling its coffee at the grocery stores, which will further increase its brand awareness nationally.

Things of note from the company’s most recent 10-K:

•192 stores in 6 states; I think this means that they have lots of room to run since there are any estimated 25,000 coffee houses in the US •California retail stores generate 60% of net revenues; I like the fact that PEET didn’t take a shotgun approach and that it concentrated in the geographic area where it is most well known •management will develop PEET’s distribution channels primarily in the western US •new products: Godiva coffees (yum!) and Peet’s bottled iced tea

Looking at the technicals, PEET has been beat up recently, dropping from the low $40s to $38 in the last couple of weeks. That said, the weekly trend is strong as one can see from the triple EMA. All 3 EMAs are sloped upwards, with the shorter term averages diverging upward. The price drop may be an opportunity to pick up the shares at a discount. I looked at the daily and hourly charts and don’t see anything scary that would prevent me from entering this position. In fact, I am planning to buy because I like what I see.

How could I express my complete disgust at PEET's $26 a share take-over of Diedrich's Coffee, a dog of a company I shorted here and in real life, with my loss locked in by PEET's offer? Ahhh, yes, short PEET.

If you think Starbucks is good, try Peets. Coffee is delivered to your door fresh-roasted only a few days before. Fantastic company, smart management that focuses on its core and only that, unlike the fore-mentioned company. 2nd quarter profits were quite tasty, should be a few more of those coming.

In the short term, they're adoption of free wifi in the retail stores will cause a bump in customer satisfaction and sales. In the longer term, their long-standing commitment to unpretentiously provide top-quality coffee -- drip, espresso, and beans -- will continue to set them apart from the competition. Now that Starbucks is faltering, it is time for companies like Peets to shine, shine, shine.